Insurers may need to factor the cost of future litigation into their directors' and officers' (D&O) liability premiums following a landmark US ruling that required Chubb subsidiary Executive Risk Solutions to pay out $US24 million ($26.9 million).

Premium hikes could also be accompanied by reduced cover, according to local D&O specialist Mark Parris.

"When insurers re-rate their capacity for the actual risks, we could see significant movement in D&O premiums and contraction in coverage," Mr Parris, a director of Melbourne-based Risk Partners, told Sunrise Exchange News yesterday.

A US court rejected a lawsuit brought by Executive Risk Solutions, which claimed it had no liability stemming from the decision of the directors of a fast food chain to settle a $US15 million ($16.8 million) securities suit with its shareholders in 2005.

The chain's shareholders brought the suit after the company restated its results following an audit. Chubb argued the restatement invalidated the directors' D&O policy.

Mr Parris says Australian insurers could also find themselves liable for unforeseen claims as local D&O policies do not specifically exclude claims arising from a restatement of accounts.

He says the ruling has come at a crucial time in the premium cycle.

"Right now you have a booming economy, a broadening of D&O cover and a softening of policy premiums," he said. "But when the market turns - which it will - insurers may find they haven't priced for the risks of litigation in the future market."

The judgement comprises $US20 million ($22.4 million) in damages - the full limit of the policy's liability - and $US4 million ($4.5 million) in pre-judgement interest.